Examine the role of cesses and surcharges in Centre–State fiscal relations, using the Central Road Fund as an illustration.

Cesses are levies set aside for a stated purpose. Surcharges are a tax on a tax. Both are kept out of the divisible pool under Article 270 [1], so the Centre does not share them with states. Their share of the Centre's gross tax revenue rose from about 10–15% (2011–20) to an estimated 24% in 2020-21 [2]. This makes them a growing pressure point in fiscal federalism.

Role: why the Centre uses them

• Earmarking: they give assured money to national priorities such as roads, education and clean energy.
• Fiscal room: money raised as a cess stays with the Centre. The same money raised as ordinary excise would be shared with states as the Finance Commission recommends [1].

Central Road Fund (CRF) as an illustration

• Colonial origin: after the Jayakar Committee, extra duty on petrol was given to provinces as block grants for road development [3]. This was an early tied transfer.
• Linked to price: in 1988, a fixed levy of a few paise per litre was replaced by 5% of the basic price of petrol and diesel [4]. The CRF Act, 2000 then made the cess on petrol and HSD statutory [5].
• Merit: road users pay through fuel, and highways and rural roads get steady money that does not depend on yearly budget cuts.

Concerns for states

• Shrinking pool: a fuel cess takes the place of excise that would have been shared, so states get less in real terms.
• Tied, not untied: states build and maintain most roads, but they get CRF money only for works the Centre approves. This reduces their autonomy.
• Diversion: the CAG found ₹48,130.71 crore of road cess was not moved into the CRF during 2010-11 to 2016-17 [6]. In 2018-19, ₹10,157 crore of road and infrastructure cess was neither transferred nor used for its purpose [7].
• Trust deficit: when the money is diverted, the cess becomes a general tax with a road label. This is why states demand a cap.

Cesses are a useful tool for earmarking money, but heavy use moves revenue away from states. The way forward is to:

• cap cesses at a share of gross tax revenue, with sunset clauses;
• move collections above the cap into the divisible pool;
• transfer the full cess to the CRF, as the CAG has urged [6];
• design a road charge for the electric-vehicle era that is linked to price.

These steps would keep earmarking for roads while restoring the tax-sharing design of Article 270.